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Phony boomy is coming?

I would like to share with you this interesting economic analysis by Wong Ang Peng, published today at Malaysiakini;

Now that the heat and fury of the general election are over, it’s time to focus attention on the economy once again.

Inflation, which has reared its ugly head, steals value. It is an invisible hidden tax that falls most heavily on the poor and the lower middle income groups.

When price of basic food items rises by 15 to 40 percent, the value of currency is reduced by the same amount.

With the world crude oil price now around US$100 per barrel, another increase in the fuel price is imminent in Malaysia, given that the elections are over. This will have a knock-on effect on
the price of utilities, food and household items and transportation costs.

The reported inflation rate for 2006 was 3.8 percent. One wonders why there has been no reported inflation rate for 2007, when we know very well that prices of food and household items have skyrocketed. Real inflation rate, which is anyone’s guess, should be 5-8 percent.

The last time Bank Negara increased interest rates was in April 2006, at 3.5 percent. When inflation began riding high throughout 2007, the interest rate was not changed.

Prudent management of the economy requires the gap between the inflation rate and interest rate to be closed in order not to create runaway inflation.

Maintaining an artificially low interest rate is both neglectful and irresponsible. Whatever the reason, such as making the economy look good before the general election, a low interest rate will stoke up a bull stock market, induce people to take loans to purchase properties, and generally to spend more.

Foreign hedge funds come in to take advantage of the cheap ringgit, the short-term capital inflow rises and the stock market goes up.

It is a phony boom. It is an artificial ‘bull’ stock market. The foreign funds will certainly pull out suddenly when rising inflation forces the interest rate up, leaving local retail speculators holding empty bags. This scenario is most likely in the aftermath of the general election.

An artificially low interest rate last year will means much higher inflation this year and beyond. Bank Negara should immediately increase the interest rate by at least 50 basis points to 4 percent, and thereafter gradually close the gap with the inflation rate.

Bank Negara should also start to accumulate more gold as reserves. However, the mother of all inflation control measures and the only way to achieve a fair and equitable economic system, is to introduce the Gold dinar into the monetary system. Only then will inflation be permanently overcome.

Basing our currency on the Gold dinar should be the long-term goal. Malaysia should take the lead and influence other countries to follow suit.

This is also the only way to break the unfair and inequitable US economic hegemony on the rest of the world. The US has an unfair advantage in that its currency is the reserve currency of the world.

We should approach the gold-based monetary system gradually as any sudden shock will incur the wrath of US, as evident in Iran. The US will find excuses to attack Iran, not because of its nuclear power reactor, but because it does not want to sell oil in US dollars.

Impact of global recession

The anticipated recession in the US will have a chain effect on the world economy, and Malaysia will be affected because a large proportion of its exports goes to the US.

Some claim that the Malaysian economy will not be much affected because the robust exports to China can cushion the decline of trade with the US. But this is misplaced confidence.

China is hosting the Summer Olympics in August. It will almost certainly shut down many coal-powered plants around Beijing to solve air pollution problems, while electricity from outside Beijing will be diverted into the city. This means manufacturing plants will have to cut production or temporarily shut down.

Furthermore the Chinese government will likely use the opportunity to cool its fast-growing economy, which it has not been able to do for two years now. Therefore, imports, including from Malaysia, will slow down.

So we have a scenario of a global economic slowdown or even depression, a high oil price that triggers hyper-inflation, and an increase in money supply worldwide. We are moving into an era of stagflation which will easily engulf us over the next five years.

The government should re-examine its plans to implement the five economic corridors, which overly ambitious, and an exorbitant and sustainable investment.

Economic spending, just like household spending, should be within our means. Furthermore, where will all the money come from? Do we have the capacity, expertise and human resources to implement all the projects at one go?

Relying on fiscal measures at a time of worldwide inflation would only be asking for trouble.

DR WONG ANG PENG is president of the Society of Natural Health Malaysia. His first degree is in economics, with post-graduate studies in natural medicine.